Sarkozy looks to stash some cash under the mattress

On the face of it, France’s 2010 budget is just what the G20 doctor ordered. No early withdrawal of economic stimulus spending. Allowing the welfare system’s “automatic stabilisers” to absorb the shock of the economic crisis. No raising of taxes or slashing of public spending until growth returns. A small shift away from tax on business towards taxation of carbon.

Of course the headline numbers are horrible and under normal circumstances would prompt disciplinary action by the European Union. The 8.5 percent forecast public deficit will be the highest in French history. Public debt will rise from 77.1 percent of GDP this year to 91 percent in 2013. The EU ceilings are a deficit of 3 percent and debt of 60 percent of GDP. But compared to Britain, Spain or Ireland, France’s deficit will look almost modest.

French governments traditionally make rosy growth assumptions at budget time, enabling them to forecast a deficit which often turns out to be bigger than planned. The European Commission then queries the growth assumption, leading to months of haggling between Paris and Brussels.

The novelty this year is that President Nicolas Sarkozy’s government has assumed lower 2010 growth (0.75 percent) than most private economists forecast. The consensus of private forecasts submitted to the government with the budget is for 1.1 percent growth next year. Some expect as much as 1.5 percent growth. If the more optimistic figures are right, Sarkozy will have a stash of cash under the mattress which he could spend to help win next year’s regional elections, for example by helping out angry milk producers, or use to cushion the impact of inevitable deficit cuts in 2011 — the year before he seeks re-election.

That might not reassure European officials, who fear Sarkozy will make no serious deficit cuts until after the 2012 presidential election. But it would be smart politics.